Barry Ritholtz on the Financial Crisis

The Browser has a good interview with money manager, occasional WashPo columnist, investment-blogger Barry Ritholtz. I’ve linked to his blogThe Big Picture, several times – usually in reference to The Big Lie. This time though The Browser sits down with Ritholtz to get his five book recommendations for understanding the Financial Crisis of ’08. One part I wanted to highlight was his response to the role of Alan Greenspan (emphasis added):

But the Federal Reserve itself should be insulated from those kinds of pressures.

They should be, except in the person of Alan Greenspan. He’s just this gnarly mass of contradictions. He’s an acolyte of Ayn Rand – believes that no intervention in free markets is the right approach – and yet he proceeded to spend his entire career, from 1987 through 2005, with his hands on the levers of Federal Reserve policy. He manipulated interest rates and money supply in order to win the love of traders. In 2001 he took rates down to unprecedented levels – below 2% – and kept them there for three years. Rates were at 1% for a full year! That had simply never occurred before in history. If you look at the late 1950s and early 1960s, rates would dip below 2%, but only for weeks at a time. In the “Who is to blame?” game Alan Greenspan is number one with the bullet, he’s top of the list. You can’t blame everything on him, but he’s the one who let all the gas fumes into the enclosed warehouse, knowing that a bunch of smokers were coming in to have a cigarette. Taking rates down to irresponsibly low rates is what set the stage for everything that took place over the next decade.

Are you saying that just as Ben Bernanke admitted the Federal Reserve had caused the first Great Depression, this crisis can also be blamed on our central bank?

The world isn’t black and white. We can’t just say, “The butler did it.” There were many causes, lots of poor judgements. […]

I see Alan Greenspan come up often with the Paulite and Randian crowd. His complicity in the events of ’07-’08 prove everything they believe. However I think Ritholtz hits it on the head with his analogy – Greenspan was the man pumping gas fumes into a building where people smoked. Take away the fumes and maybe the building doesn’t explode, causing the whole neighborhood to go down with it – but he didn’t manufacture the cigarettes and didn’t get the smokers into the building into the first place. The landscape was already there when Greenspan showed up.

One of the books he mentions is Michael Lewis’s The Big Short. It’s one I’ve read and highly recommend for an offbeat view of the crisis. Lewis has unique viewpoint on what happened, having been part of the scene for many of the crisis’s building blocks in the ’80’s (which he also wrote about). Probably the most important thing you can take away from The Big Short is how prevalent moral hazard played a role on Wall Street with the derivatives game. Some folks are especially keen on highlighting feckless borrowers not reading the labyrinth of legalese in their mortgage contracts, but good golly that irresponsibility doesn’t hold a candle to what some of these traders did.

Look, a lot of people have trouble accepting that the Financial Crisis of ’08 was an event that, in many ways, was a long time coming. Because the development has such a complex causal tail it’s very easy for people to manipulate information that conforms to their preexisting world views. Another way to put it this: the Financial Crisis proved everyone right and everyone else wrong.



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